Economic optimism is inflated and there is a deficit of clear thinking

So: the government has a fiscal plan, confirmed by the Queen, under which it will halve the budget deficit in four years and eliminate it in due course. It will happily be committed by legislation to do so.

Of course, it may not be the government after next June. But relax, you neanderthal deficit-watchers, a new government led by my acquaintance David Cameron will get to grips with matters, via a leaner, meaner approach to the deficit, while being more caring towards the poor than either the Labour party or previous Conservative governments. Of course if you believe the latter part of that promise, you will believe anything.

It was because, with the best will in the world, philanthropists, charitable organisations and the "voluntary sector" could not cope with the alleviation of poverty that the Liberals under Lloyd George's chancellorship, Labour under Clement Attlee's premiership and the Conservatives, ably guided by a man who never became prime minister, Rab Butler, accepted there was necessarily a role in these matters for "big government".

And the finer points of how the Brown/Darling administration will cut the deficit? The Conservatives have had a field day with the government's lack of detail, but have been indulging in a cynical political exercise, because they know full well that such is not a matter for the Queen's speech but for next month's pre-budget report.

Also, one suspects, the Brown/Darling administration is painfully aware that, in second-guessing the Conservatives by going along with the conventional view that the deficit needs to be reduced, they are taking a huge risk, namely that they may nip what everybody hopes is an incipient economic recovery in the bud.

Readers will be well aware that several seasons have been and gone since certain brave souls pronounced that they had spotted "green shoots" springing up in the soil of the British economy. They were not spotted in this column, because – well, because they were not there. However, life is full of surprises and it has taken a quite sensationally beautiful English and Welsh autumn (I have not strayed north of the border recently) for a growing (I use the word advisedly) number of observers to pronounce the recession is over, and that, with the aid of what economists might call a "real-time seasonal adjustment", globally-warmed green shoots are displacing those stunning autumnal leaves.

People point to Bank of England forecasts of 2.2% economic growth in 2010 and 4.2 % growth in 2011. Gosh, I hope it is right. It is just that I have an uneasy feeling that this is a rather unusual recession and that, for all the hard work that goes into Bank of England economic forecasts (and I know it does: I've worked for the Bank in my time), the full potential impact of the credit crunch is simply not captured in those computerised equations. I suspect, without evidence that would convince a court of law, that the governor of the Bank of England is of the same, or similar, mind. This would help to explain why Mervyn King was so downbeat in his comments at the recent press conference launching the Bank's Inflation Report.

Having been critical many years ago of the reasoning that lay behind the title of the Bank's most publicly known commentary on the economy, I am now almost inclined to relent. For in my view the biggest threat faced by our own and other comparable economies in recent years has been that of 1930s-style deflation; it is well established empirically that a small, and preferably perfectly formed dose of inflation oils the wheels of a modern economy; whereas deflation, or a fall in the average price level, heralds all manner of dangers, as in modern times the Japanese can testify.

For instance: in recent weeks the financial press has been citing sharp "real" growth in the Japanese economy as a sign that recovery is well embedded in the G7 countries. But it turns out that "real growth" is in fact "unreal". Because Japan has been experiencing deflation – ie, falling prices – a slight reduction in nominal gross product becomes, after allowing for a decline in prices, a so-called "real" increase. This is an altogether different phenomenon from what, in normal times, we regard as a "real" increase – for example, a 5% rise in nominal GDP becomes a 3% rise if you allow for inflation of 2%.

Back here in the UK, there are sudden worries about a slight increase in inflation. We should be so lucky. Ask the Japanese. It's quite reassuring news that we have an inflation report from the Bank of England.

I share my good friend Mervyn King's concerns about the way the banking system is likely to be a constraint on growth, and I cannot emphasis enough the way that the German government has decided, notwithstanding the pre-election rhetoric of the wonderful Angela Merkel and her rightwing finance minister about "the deficit", to go for growth and forget, for the time being, about the deficit.

The people who matter in Germany have finally recognised that the threat of deflation is a far cry from Weimar Republic "wheelbarrow" inflation. (For younger readers, inflation was so rampant in Germany after the first world war that people needed a wheelbarrow filled with currency to buy a single loaf of bread.) British Conservatives who compare the state of the present British government's finances with those of Zimbabwe do not know what they are talking about.

Which brings us back to those fiscal rules. It is naive and pointless to try to tie down a democratically elected government to fiscal rules; Gordon Brown has learned that to his cost.

The Germans are pragmatically ignoring the EU stability and growth pact. As Kenneth Clarke told me at the Dublin European Council of 1996, when I complained to him about the ambitious strictures of the pact: "In the end, the people who will have to interpret the rules are the politicians."